<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from to .
-------- ------
Commission file number 0-28656
KARRINGTON HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1461482
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
919 OLD HENDERSON ROAD
COLUMBUS, OHIO 43220
(Address of principle executive offices)
(614) 451-5151
(Registrant's telephone number, including area code)
Indicated by check mark whether registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Shares of Registrant's common shares, without par value, outstanding at
May 13, 1998 was 6,837,363.
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<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997 . . . . . . . . 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 9-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 13
Signature Page . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
Note: Item 3 of Part I and Items 1 through 5 of Part II are omitted because
they are not applicable.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
(Unaudited)
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 4,723 $ 4,370,488
Receivables:
Trade. . . . . . . . . . . . . . . . . . . . . . . 652,845 482,597
Due from REIT. . . . . . . . . . . . . . . . . . . 4,154,200 4,330,981
Affiliates.. . . . . . . . . . . . . . . . . . . . 1,445,375 649,172
Prepaid expenses . . . . . . . . . . . . . . . . . . 267,582 281,722
-------------- --------------
Total current assets . . . . . . . . . . . . . . 6,524,725 10,114,960
Property and equipment - net . . . . . . . . . . . . . 128,839,975 115,983,043
Cost in excess of net assets acquired - net. . . . . . 8,175,306 8,231,073
Other assets - net . . . . . . . . . . . . . . . . . . 7,635,892 6,986,724
-------------- --------------
Total assets . . . . . . . . . . . . . . . . . . $ 151,175,898 $ 141,315,800
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . $ 2,921,951 $ 2,535,969
Construction payables. . . . . . . . . . . . . . . . 2,435,879 4,717,230
Notes payable-banks. . . . . . . . . . . . . . . . . 6,991,510 6,000,000
Payroll and related taxes. . . . . . . . . . . . . . 907,717 1,080,884
Unearned resident fees . . . . . . . . . . . . . . . 976,216 861,266
Interest payable . . . . . . . . . . . . . . . . . . 562,297 614,919
Current portion of long-term obligations.. . . . . . 983,444 998,523
-------------- --------------
Total current liabilities. . . . . . . . . . . . 15,779,014 16,808,791
Long-term obligations. . . . . . . . . . . . . . . . . 110,532,310 97,507,467
Deferred income taxes. . . . . . . . . . . . . . . . . 493,000 493,000
Minority interests.. . . . . . . . . . . . . . . . . . 652,000 -
Shareholders' equity:
Common shares . . . . . . . . . . . . . . . . . . . 33,484,712 33,484,712
Accumulated deficit.. . . . . . . . . . . . . . . . (9,765,138) (6,978,170)
-------------- --------------
Total shareholders' equity. . . . . . . . . . . . 23,719,574 26,506,542
-------------- --------------
Total liabilities and shareholders' equity . . . $ 151,175,898 $ 141,315,800
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Residence operations . . . . . . . . . . . . . . . . $ 6,433,965 $ 2,939,488
Development and management fees. . . . . . . . . . . 266,645 194,152
------------ ------------
Total revenues . . . . . . . . . . . . . . . . . 6,700,610 3,133,640
Expenses:
Residence operations . . . . . . . . . . . . . . . . 5,014,454 2,075,198
General and administrative . . . . . . . . . . . . . 1,689,546 890,182
Rent expense . . . . . . . . . . . . . . . . . . . . 160,879 47,592
Depreciation and amortization. . . . . . . . . . . . 1,103,383 375,113
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Total expenses.. . . . . . . . . . . . . . . . . 7,968,262 3,388,085
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Operating loss . . . . . . . . . . . . . . . . . . . . (1,267,652) (254,445)
Interest expense . . . . . . . . . . . . . . . . . . . (1,346,842) (148,990)
Interest income. . . . . . . . . . . . . . . . . . . . 39,365 155,060
Equity in net loss of unconsolidated entities. . . . . (211,839) (23,951)
------------ ------------
Loss before income taxes . . . . . . . . . . . . . . . (2,786,968) (272,326)
Deferred income taxes. . . . . . . . . . . . . . . . . - 109,000
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Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (2,786,968) $ (163,326)
------------ ------------
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Net loss per common share-basic and diluted. . . . . . $ (0.41) $ (0.02)
Weighted average common shares outstanding . . . . . . 6,837,363 6,700,000
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (2,786,968) $ (163,326)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . 1,103,383 375,113
Provision for terminated projects. . . . . . . . . . 360,000 -
Deferred income taxes. . . . . . . . . . . . . . . . - (109,000)
Equity in net loss of unconsolidated entities. . . . 211,839 23,951
Change in operating assets and liabilities:
Accounts receivable.. . . . . . . . . . . . . . . 87,246 (143,695)
Prepaid expenses. . . . . . . . . . . . . . . . . 14,140 30,664
Accounts payable and accrued liabilities. . . . . 986,580 84,050
Other liabilities . . . . . . . . . . . . . . . . (92,919) (186,439)
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Net cash used in operating activities. . . . . . . . (116,699) (88,682)
INVESTING ACTIVITIES
Purchase of property and equipment . . . . . . . . . . (19,902,515) (8,831,976)
Decrease (increase) in restricted cash balances. . . . (944,077) 670,289
Payments of pre-opening costs. . . . . . . . . . . . . (543,849) (255,514)
Payments for organization costs and other. . . . . . . (30,779) (182,650)
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Net cash used in investing activities. . . . . . . . (21,421,220) (8,599,851)
FINANCING ACTIVITIES
Proceeds from notes payable. . . . . . . . . . . . . . 991,510 2,600,000
Proceeds from mortgages. . . . . . . . . . . . . . . . 15,622,967 1,893,574
Repayment of mortgages . . . . . . . . . . . . . . . . (77,992) (76,825)
Minority interests equity contributions. . . . . . . . 652,000 -
Payment for financing fees . . . . . . . . . . . . . . (16,326) (20,918)
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Net cash provided by financing activities. . . . . . 17,172,159 4,395,831
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Decrease in cash and cash equivalents. . . . . . . . . (4,365,760) (4,292,702)
Cash and cash equivalents at beginning of period . . . 4,370,483 12,283,185
------------- -----------
Cash and cash equivalents at end of period . . . . . . $ 4,723 $ 7,990,483
------------- -----------
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest . . . . . . . . . . . . . . . . $ 2,311,076 $ 941,077
------------- -----------
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</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1. BASIS OF PRESENTATION
The consolidated financial statements as of March 31, 1998 and for the three
months ended March 31, 1998 and 1997 are unaudited; however, in the opinion
of management, all adjustments (consisting of only normal recurring items)
necessary for a fair presentation of the consolidated financial statements
for these interim periods have been included. The results for the interim
period ended March 31, 1998 are not necessarily indicative of the results to
be obtained for the full fiscal year ending December 31, 1998. Certain
information and note disclosures which would duplicate the disclosures
normally included in annual financial statements have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
2. NET LOSS PER COMMON SHARE
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share,"
which eliminates the presentation of primary earnings per share (EPS) and
requires the presentation of basic EPS (the principal difference being that
common stock equivalents are not considered in the computation of basic EPS).
It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures. The
Company was required to adopt Statement No. 128 for its year ended December
31, 1997.
The net loss per common share-basic and diluted for the three months ended
March 31, 1998 and 1997 is computed based on the weighted average number of
shares outstanding during each period as the effect of including any common
share equivalents would be antidilutive. Common share equivalents are
comprised of outstanding stock options.
3. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company and Catholic Health Initiatives ("CHI") have entered into joint
venture agreements to develop, own and operate six assisted living residences
in Ohio, New Mexico and Colorado. Each project is owned jointly by the
Company and CHI, with the Company owning 20-50% of the equity of each
venture. As of March 31, 1998, the Company has guaranteed $1 million of
joint venture debt financing.
Effective January 1, 1998, the Company entered into a joint venture agreement
with a local hospital to operate an assisted living residence in Findlay,
Ohio which opened on December 31, 1997. The joint venture is owned 50% by
the Company and is accounted for using the equity method of accounting.
6
<PAGE>
As of March 31, 1998, seven residences were open and three other potential
joint venture sites were under development. Three residences were open at
March 31, 1997. Summarized unaudited income statement information of these
joint ventures is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
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<S> <C> <C>
Residence revenues $ 2,289,765 $ 1,069,255
Expenses:
Operating expenses 2,014,040 877,648
Depreciation and amortization expense 505,758 194,542
Interest expense 549,039 189,795
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Total expenses 3,068,837 1,261,985
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Net loss $ (779,072) $ (192,730)
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</TABLE>
4. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
The outstanding balance of $1,991,510 on the Company's $3 million revolving
credit agreement was repaid on April 1, 1998 at which time the agreement
expired. In March 1997, the Company entered into a $5 million line of credit
expiring May 1999. At March 31, 1998, there was $6,991,510 outstanding under
these agreements.
The Company entered into non-binding financing commitment letters with
Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust (a
large health care REIT). Under the letters, MMI is to provide up to
approximately $100 million in financing for one existing and approximately 13
new residences, subject to various terms and conditions. The financings,
which may be mortgage or lease financings, are to be entered into on a
residence-by-residence basis, and are to be for terms of up to 14 years (with
two additional five-year extension periods for the lease transactions). As
of March 31, 1998, the Company has completed mortgage agreements for four
residences totaling $22.4 million and six operating lease transactions
totaling $46.2 million.
On April 30, 1997, the Company entered into a $27.6 million promissory note
in conjunction with its acquisition of Kensington. The amount outstanding
under the agreement was approximately $19.9 million as of March 31, 1998.
The remaining funds will be disbursed in two phases at such time that the
Rochester, Minnesota cottages achieve certain debt service coverage ratios.
In September 1997, the Company entered into a $7.5 million promissory note
with JMAC, Inc., a 34% shareholder of the Company. Interest is payable
monthly and accrues at a banks prime rate. The note expires on January 2,
2000. At March 31, 1998, $7.5 million was outstanding under this agreement.
On October 17, 1997, the Company entered a $14 million construction loan
agreement for the development and construction of assisted living residences
in the State of Ohio. As of March 31, 1998, the Company has completed
mortgage agreements for three residences totaling $12.0 million.
7
<PAGE>
In January 1998, the Company entered into two additional construction
mortgages totaling $13.6 million at a variable interest rate of LIBOR plus
2.75%
5. SUBSEQUENT EVENTS
In April 1998, the Company sold four assisted living residences for
approximately $23.3 million and leased them back under a 20-year leaseback
agreement which includes two ten-year renewal options. The transaction
resulted in a gain of approximately $8.8 million which will be deferred and
amortized over the lease period. The proceeds of the transaction were used
to repay mortgage debt of $15.6 million and short-term debt of $3.5 million.
The balance of the proceeds will be used for future development activities
and working capital needs.
In April 1998, the Company entered into a $4 million construction mortgage
for the completion of five Karrington Cottages expiring on April 30, 1999.
Interest is payable monthly and accrues at a rate of prime plus 1%.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties.
The Company's actual results could differ materially from those anticipated.
Factors that could cause or contribute to such differences include, but are
not limited to, development activity and construction process risks,
availability of financing for development or construction, government
regulations, competition, and the challenge to manage rapid growth and
business expansion.
OVERVIEW
The Company is an operator and owner of licensed, assisted living residences
which provides quality, professional, personal and health-care services,
including an emphasis on Alzheimer's care, for individuals needing assistance
with activities of daily living. These activities include bathing, dressing,
meal preparation, housekeeping, taking medications, transportation, and other
activities that, because of the resident's condition, are difficult for
residents to accomplish in an independent living setting. The Company offers
its customers a dignified residential environment focused on quality of life.
The Company also provides development, support and management services to its
joint venture residences. As of March 31, 1998, the Company had 32
residences, including joint ventures, open in eight states with a capacity of
approximately 1,700 residents and 14 additional residences under construction
in six states with a capacity of over 900 residents.
The Company derives its revenues primarily from two sources: (i) resident
fees for the delivery of basic assisted living care services (80% of total
revenues in 1998) and (ii) extended and special needs care services and
community fee revenue (16% of total revenues in 1998). Resident fees include
revenue derived from basic assisted living care, community fees, extended and
special needs care, Alzheimer's care and other sources. Community fees are
one-time fees generally payable by a resident upon admission, and extended
care and Alzheimer's care fees are paid by residents who require personal
care in excess of services provided under the basic care program.
The following table sets forth certain information regarding Karrington
residences as of March 31, 1998:
<TABLE>
<CAPTION>
COMPANY JOINTLY OWNED TOTAL
RESIDENCES RESIDENCES SYSTEM
------------------------------ ------------------------------- -----------------------------
RESIDENCES UNITS BEDS RESIDENCES UNITS BEDS RESIDENCES UNITS BEDS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Open 25 1,025 1,256 7 369 438 32 1,394 1,694
Under Construction 14 749 919 - - - 14 749 919
In Development:
Under Contract & Zoned 10 681 790 3 187 219 13 868 1,009
Under Contract & In Zoning 4 285 332 - - - 4 285 332
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain data from the respective consolidated
statements of operations as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Total revenues 100.0 % 100.0 %
Expenses:
Residence operations 74.8 66.2
General and administrative 25.2 28.4
Rent expense 2.4 1.5
Depreciation and amortization 16.5 12.0
---------- ----------
Total expenses 118.9 108.1
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Operating income (loss) (18.9)% (8.1)%
---------- ----------
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End of period (a):
Number of residences 25 7
Number of units 1,025 369
</TABLE>
(a) Excludes residences jointly-owned by the Company accounted for by
the equity method.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total revenue increased $3.6 million, or 114%, to $6.7 million in the first
quarter of 1998 from $3.1 million in the first quarter of 1997 primarily due
to the acquisition of Kensington Management Group, Inc. and affiliates
("Kensington") on April 30, 1997 ($2.2 million), the opening of new
residences ($1.1 million) and the increased occupancy of residences in the
fill-up phase in 1997.
Average occupancy for the four stabilized residences for the three months
ended March 31, 1997 was 95%. For the three months ended March 31, 1998, the
average occupancy for 16 stabilized residences was 91%, excluding an older
66-unit hotel conversion acquired in the Kensington transaction which
averaged 67% for the quarter. Comparing the same stabilized residences in
each quarter, average occupancy decreased from 95% to 91% or approximately 13
units over four residences. Currently, these 16 stabilized residences have
increased occupancy from 91% to 92%. The Company defines stabilized
residences as those residences (72 units or less) that have been operated by
the Company for 12 months or more as of the beginning of the period presented
or that have achieved occupancy of 95%.
Residence operating expenses increased $2.9 million, or 142%, to $5.0 million
in the first quarter of 1998 from $2.1 million in the first quarter of 1997.
As a percentage of residence operating revenues, residence operating expenses
increased from 71% in the first quarter of 1997 to 78% in the first quarter
of 1998. The increase in operating expenses as a percentage of operating
revenues resulted from start-up losses associated with residences open less
than one year and a decline in occupancy percentages of stable residence as
discussed above.
General and administrative expenses increased $.8 million, or 90%, to $1.7
million in the first quarter of 1998 from $0.9 million in the first quarter
of 1997 primarily due to increased headcount and associated
10
<PAGE>
payroll, including the acquisition of Kensington, of $0.3 million and a
provision for terminated projects of $0.4 million. The Company expects that
the rate of increase in its general and administrative expenses will decrease
as corporate overhead was front loaded for 1998 expansion. In addition, the
Company expects general and administrative expenses will continue to decrease
as a percentage of total revenues due to anticipated economies of scale
resulting from the Company's forward home expansion.
Rent expense increased $113,000, or 238%, to $161,000 in the first quarter of
1998 due to the opening of three leased residences in the first quarter of
1998, the Company's first leased homes.
Depreciation and amortization increased $0.7 million, or 194%, to $1.1
million in the first quarter of 1998 from $0.4 million in the first quarter
of 1997 primarily due to the opening of new residences ($0.5 million) and the
acquisition of Kensington.
Interest expense increased $1.2 million, or 804%, to $1.3 in the first
quarter of 1998 from $0.1 million in the first quarter of 1997 primarily due
to the opening of new residences ($0.4 million), the acquisition of
Kensington ($0.6 million) and the increased use of the Company's lines of
credit.
The equity in net loss of unconsolidated entities increased due to four joint
venture residences in the fill-up phase during the first quarter of 1998
compared to no joint venture residences in the fill-up phase during the first
quarter of 1997.
No deferred tax benefit was recorded in the first quarter of 1998 due to
limitations associated with the recognition of operating loss carryforwards
and other tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its initial growth through a combination of mortgage
financing, sale/leasebacks, a development bond, subordinated borrowings from
JMAC and its affiliates, equity contributions and proceeds from the initial
public offering in 1996. The Company's mortgage and construction mortgage
financings mature in the next one to thirteen years, bear interest at various
fixed and fluctuating rates and are secured by substantially all of the
assets of the Company. The Company expects to refinance such amounts as they
mature.
The Company has entered into non-binding financing commitment letters with
Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust (a
large health care REIT). Under the letters, MMI is to provide up to
approximately $100 million in financing for one existing and approximately 13
new residences, subject to various terms and conditions. The financings,
which may be mortgage or lease financings, are to be entered into on a
residence-by-residence basis, and are to be for terms of up to 14 years (with
two additional five-year extension periods for the lease transactions). As
of March 31, 1998, the Company has completed mortgage agreements for four
residences totaling $22.4 million and six operating lease transactions
totaling $46.2 million.
On April 30, 1997, the Company entered into a $27.6 million promissory note
in conjunction with its acquisition of Kensington. The amount outstanding
under the agreement was approximately $19.9 million as of March 31, 1998.
The remaining funds will be disbursed in two phases ($1.8 million and $5.9
million) at such time that certain Rochester, Minnesota cottage homes achieve
certain debt service coverage ratios.
On October 17, 1997, the Company entered a $14 million construction loan
agreement for the
11
<PAGE>
development and construction of assisted living residences in the State of
Ohio. As of March 31, 1998, the Company has completed mortgage agreements
for three residences totaling $12.0 million.
As of March 31, 1998, the Company had two lines of credit totaling $8.0
million of which $7.0 million was outstanding. On April 1, 1998, the
outstanding balance on a $3.0 million line of credit was repaid at which time
the agreement expired.
For the three months ended March 31, 1998 and 1997, net cash flows used by
operating activities were $117,000 and $89,000 respectively. The Company used
$21.4 million and $8.6 million, respectively, primarily to fund residence
development and received $17.2 million and $4.4 million, respectively, in
cash from financing activities. At March 31, 1998, the Company had
restricted cash of approximately $1.7 million recorded in other assets on the
consolidated balance sheet.
In 1998 and 1999, the Company plans to open approximately 40 new Company and
jointly-owned residences. To date, the Company has opened 11 of these
residences, has 8 residences under construction, has obtained zoning approval
for an additional 13 residences and has entered into contracts to purchase 4
additional sites. The Company has been, and will continue to be, dependent
on third-party financing for its acquisition and development program. The
Company estimates that newly developed residences will generally range in
cost from $5.0 to $11.0 million, with the development cycle taking up to 24
months from site identification and zoning to construction and to residence
opening. There can be no assurance that financing for the Company's
development program will be available to the Company on acceptable terms, if
at all. Moreover, to the extent the Company opens properties that do not
generate positive cash flow, the Company may be required to seek additional
capital for working capital and liquidity purposes.
Additional financing will be required to develop and construct residences
opening in 1999 and beyond and to refinance certain existing indebtedness.
As of March 31, 1998, the Company had unused commitments of approximately $35
million from existing debt and lease agreements. In April 1998, the Company
completed a sale/leaseback transaction for four residences generating
approximately $8 million in net proceeds after associated mortgage repayment.
The Company is currently evaluating and negotiating with various lenders with
respect to traditional mortgages, sale/leaseback transactions and other forms
of off-balance sheet financing and expects to complete a sale/leaseback
transaction for two additional residences in late May or June 1998. The
Company has existing financing in place in the form of loans or leases for
the 8 residences currently under construction and expected to open in 1998.
The Company believes its existing financing commitments, together with
additional anticipated financing, will be sufficient to fund its development,
construction and working capital needs through 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities" which requires that the costs
of start-up activities and organization costs be expensed as incurred. SOP
98-5 is effective for fiscal years beginning after December 15, 1998 with
earlier application encouraged. Management has not completed its review of
SOP 98-5 and therefore has not decided whether it will apply the provisions
of the SOP prior to 1999. The application of SOP 98-5 will require the
Company to write-off all existing deferred preopening and organization costs
(for example $1.3 million at January 1, 1998) and expense all such items as
incurred on a prospective basis.
12
<PAGE>
II. OTHER INFORMATION
Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit Number Description
-------------- -----------
<C> <S>
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not
filed.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three month period ended
March 31, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 15, 1998
KARRINGTON HEALTH, INC.
(Registrant)
/s/ RICHARD R. SLAGER
- ---------------------------------
Richard R. Slager
Chief Executive Officer
/s/ THOMAS J. KLIMBACK
- ---------------------------------
Thomas J. Klimback
Chief Financial Officer
14
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<C> <S>
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only.
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KARRINGTON
HEALTH, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,723
<SECURITIES> 0
<RECEIVABLES> 6,252,420
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,524,725
<PP&E> 133,405,804
<DEPRECIATION> 4,565,829
<TOTAL-ASSETS> 151,175,898
<CURRENT-LIABILITIES> 15,779,014
<BONDS> 0
0
0
<COMMON> 33,484,712
<OTHER-SE> (9,765,138)
<TOTAL-LIABILITY-AND-EQUITY> 151,175,898
<SALES> 0
<TOTAL-REVENUES> 6,700,610
<CGS> 0
<TOTAL-COSTS> 5,175,333
<OTHER-EXPENSES> 2,965,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,346,842
<INCOME-PRETAX> (2,786,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,786,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,786,968)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
